A federal appeals court has reversed the Tax Court, handing a supermarket chain a victory in its attempt to deduct rewards that shoppers had earned but had not yet redeemed at the end of the year.
Under Giant Eagle’s “fuelperks!” program, for every $50 customers spend on qualifying groceries, an Advantage Cardholder earned a 10 cents-per-gallon discount on gas. On its 2006 and 2007 corporate income tax returns, the Pittsburgh-based grocery chain claimed a deduction for the discounts its customers had accumulated but, at year’s end, had not yet applied to fuel purchases. The IRS disallowed the deductions.
The Tax Court found in Giant Eagle, Inc. v. Commissioner that Giant Eagle’s claimed deductions did not satisfy the “all events” test because the purchase of gasoline functioned as a condition precedent to customers’ redemption of discounts earned at checkout. Therefore, according to the Tax Court, the fuelperks-related liability became fixed only after customers applied the accumulated discounts to a fuel purchase, which in the case of the disallowed deductions, occurred after the end of the tax year.
The U.S. Court of Appeals for the Third Circuit said that by disallowing deductions claimed on the basis of established recurring expenses, the Tax Court obliterated the distinction between the cash and accrual methods.
“The Tax Code does not limit the availability of deductions to expenses for which payment is certain,” the Third Circuit stated. “Rather, accrual method taxpayers are expressly permitted to deduct expenses before they are paid, so long as ‘all events have occurred which determine the fact of liability and the amount of such liability can be determined with reasonable accuracy.’ A codified legal fiction affords taxpayers even greater flexibility in the realm of recurring expenses, for which an anticipated liability may be deemed ‘incurred’ even if the predicate costs are not themselves incurred during the year a deduction is claimed,” the court stated.
The court remanded the case to the Tax Court with instructions to grant judgment in favor of Giant Eagle on the basis that the claimed deductions are permissible under the “all events” test.
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